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Monday, March 23, 2009

Spend, spend, spend: Obama's Solution to the Economic Crisis

I had hoped that after Obama was sworn in as President the hype would settle down, reality would set in and the public would begin to realize that this man, for all his pretensions, is really only a man.

It turns out that my hope was naive. If a routine trip to our local shops is anything to go by, Obama has already achieved the kind of mythic significance that has normally been reserved for assassinated presidents.

For example, at our supermarket you can buy Barack and Michelle trading cards (the political equivalent of American baseball cards). Not to be beat, our local craft store is selling Obama wall posters and calendars. And finally, the toy stores are selling Obama action figures, complete with a hand gun and lightsaber.

Amid all the Obama hysteria, far less attention is being given to his actual policies. I will leave the reader to judge whether the policies pursued during the Presidents’ first months in office have done justice to his reputation as a guru of wisdom and sagacity.

Stimulating Times

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Obama took the oath of office at a critical time in American history. Following years of oppressive taxes and careless spending under Bush, America is now facing the worst economic downturn since the great depression.

From the very beginning of his administration, Obama’s applied himself to the economic crisis with a vengeance. Following aKeynesian approach to economics, his solution can be summarized in three words: spend, spend, spend.

Obama’s spending plans culminated in what Charles Colson has called ‘one of the biggest grab-bag boondoggles in American history’, namely the $800 billion ‘stimulus package.’ Known now as the American Recovery and Reinvestment Act, it aims to revitalize America by pumping unprecedented amounts of tax-payers dollars into the national economy.

Ever since the plan was enacted on February 17, it has been possible to track where all the new money is going through the government’s website

It seems that everyone is getting a piece of the pie. For starters, Government employees will be receiving pay rises in April, while the 12.5 million workers receiving unemployment benefits will also start seeing a boost in their weekly payments. Those whose employment was involuntarily terminated during the period between Sept. 1, 2008, and Dec. 31, 2009 will qualify for the 65 percent health care premium subsidy. The Social Security Administration's website has promised a one-time payment of $250 to the 55 million Social Security and other supplemental income beneficiaries.

That is not all. Obama is sending $200 million for a clean-burning power plant in Mattoon, Ill, $500 million to the National Institutes of Health offices in Maryland, $750 million to the National Computer Center in Maryland, $275 million to flood prevention, $200 million to public computer centres at community colleges and libraries, $650 million to the public in the form of digital TV converter-box coupons, $8 billion to an investment fund for building high-speed rail, $1 billion to administrative costs and construction of National Oceanic and Atmospheric Administration office buildings, over $2.2 million to Virginia for programs providing meals to low-income seniors.

I wish I could say that the spending spree stopped there. $100 million has been set aside for constructing U.S. Marshals office buildings, $1.3 billion for NASA, $300 million for hybrid and electric cars for the federal government (including golf carts for federal workers).

Red Ink As Far As The Eye Can See

Obama’s $800 billion ‘stimulus package’ is just the first stage and doesn’t even include the $3 trillion-plus budget that he will be bringing forward in a few months. Nor does it include the $15 billion a year that he has promised over the next ten years for children's healthcare, computerized health records, educational reforms and developing resources for solar and wind power.

Altogether Obama is proposing to spend a staggering $3.6 trillion in the 2010 fiscal year, making previous irresponsible deficits look like child's play. (In reality, it will probably be a lot higher. Even as I write, headlines have broken that the President’s climate plan alone could cost as much at $2 trillion, nearly three times the White House's initial estimate.)

.Few people are asking where all the new money is actually going to come from. To Obama, the answer is straight-forward: simply increase taxes on the wealthiest 2% of Americans.

There is a slight problem, however. According to IRS figures for 2006 (the most recent year for which sufficient tax data is available), even if the government confiscated 100% of the taxable income of all Americans earning over $500,000, Congress would only get an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget and only a quarter of what Congress will have to fork out in fiscal 2010 under Obama’s spending proposals. And this doesn’t take into effect the collateral impact that burdensome taxation will have on the businesses government plunders and the jobs those businesses might otherwise have been able to create. It also doesn’t take into account that 2006 was a good year for the economy, whereas this year the economy shrunk by 6.2% in the 4th quarter and continues in a state of meltdown. That means that Congress will have significantly less revenue in their coffers than they had in 2006.

The cold reality is that Obama’s spending plan will have to be financed almost entirely by debt. Indeed, under his $3.6 trillion budget proposal, deficit spending for 2009 will increase to 12.7% of the Gross Domestic Product. That is twice as large a share of the economy as any deficit has run since World War II. By 2019 this pattern will have brought the federal deficit to 82% of the overall economy, according to analysts with the nonpartisan Congressional Budget Office.

Now consider that America’s resources are stretched almost to breaking point, that the nation is already crippled with unpayable debt, and that the influx of new money is poising the nation for serious hyperinflation. When we factor in these considerations we have to question the sanity of a spending policy that gives us red ink as far as the eye can see. We also have to ask: even if all that money was available in Uncle Sam’s coffers, why not give it back to Americans in the form of tax cuts in order to re-stimulate business and investment?

The Necessity of Bankruptcy

Frank Borman once noted that, “Capitalism without bankruptcy is like Christianity without hell.” In economics, as in religion, if people have the possibility of reward but not the potential for loss, then there is little incentive for prudence and discretion. As I have noted previously, this explains what happened to America during the period known as the ‘Great Depression.’

The economic crisis of the 1930s did not occur out of the blue, nor was it caused by a series of runs on the bank. Rather, it was caused by government intervening to cushion the consequences of imprudent investments, very similar to the way Obama is now trying to use the stimulus package to dampen the results of the foolish financial policies pursued in government and the private sector.

Leading up to the Great Depression, the American economy had experienced massive growth but much of that growth was illusory, propelled by investment in companies exceeding their actual profits. Because many companies had a value higher than their earnings (in some cases no earnings at all), people began to grasp that their shares weren’t worth as much as they paid. The banks realized this too, and so they began to call loans. Now naturally when banks begin to call bad loans, this creates losses. But this is not a bad thing. In a free market, both loss and growth are necessary components for stability, since bad business practices are then allowed to suffer their natural consequences. However, instead of letting things to take their natural course, the government stepped in to try to doctor up the economy. From 1923-29, the American money supply was increased 61 times by the Federal Reserve, not dissimilar to the unprecedented amounts of debt money Obama is now pumping into the national economy. This amplified inflation which accelerated the boom market, perpetuating the illusory sense of prosperity. Naturally the new money supply encouraged more imprudent investments.

.Things could only be put off for so long and in February of 29 the stock market ceased to expand, causing Wall Street to collapse. President Herbert Hoover responded by doctoring the market again. In ‘31 he launched the greatest peace-time deficit spending program in history to try to prop up the economy. All he achieved was simply to perpetuate the vicious cycle for longer.

During America’s recent economic boom, the Federal Reserve deliberately kept interest rates low in order to encourage investments. As in the 1920’s, this distorted the market because it allowed entrepreneurs to engage in malinvestments - investments which failed to take into account actual resource availability. America is now facing the necessary fall-out of such foolishness, and that is a good thing. However, instead of allowing the consequences of imprudence to play out, Obama is following the example of Hoover (right) in trying to artificially prop up the market. Through his Public-Private Investment Program, government will help purchase as much as $1 trillion in toxic assets on banks' books. By thus removing the consequences of bad business practices, he is setting a terrible precedent.

In Government We Trust

If unchecked in fulfilling his promises, Obama will push government spending to approximately 40% of the Gross Domestic Product, up from about 33% in 2000. This would put the size of the US government within reach of Europe, where government spending currently eats up 46% of the GDP.

Now here’s the crunch: when Government reaches those kinds of colossal proportions, people begin to think of themselves, and God, differently.

Recently political scientists at the University of Washington studied 33 countries around the world and discovered an inverse relationship between state welfare spending and religiosity. Countries with larger welfare states had markedly lower levels of religious attendance with a greater number of citizens not subscribing to any religious affiliation. As the report notes, “Countries with higher levels of per capita welfare have a proclivity for less religious participation and tend to have higher percentages of non-religious individuals.”

The implications of this study are clear: as government grows, people’s reliance on God seems to diminish. This has already proved to be the case in Europe, in particularly in the Scandinavian countries where the Nanny state provides cradle-to-the-grave care for all its citizens.

Under Obama America seems to be headed towards Scandinavian-style socialism. As it becomes increasingly difficult to say no to government funds, everything from health care to energy to all the nation’s primary industries could become semi-nationalized. Indeed, this has already occurred with education and is in the process of happening with the financial and auto industries, thanks to government bailouts.

The state-dependency invoked by this kind of semi-socialism naturally orients citizens to think paternally of the state, as I argued in my post "Why I did Not Vote For Obama." However, unlike a responsible human parent, the paternal state thrives on dependency and is inescapably parasitic on the very persons whom it turns into parasites. This should not be a hard point to grasp, seeing that the government can only give away what it first takes from someone else (even deficit spending and arbitrary money-printing are essentially processes of confiscation, since the inflation these processes spawn removes value from the currency already held by the populace). The net result is that both the state and its dependents march symbiotically to destruction.

How does this destruction play out in practice? Again, you only have to look at the Scandinavian countries to see. W. Bradford Wilcox observes that “many Scandinavians, especially young adults who have grown up taking the welfare state for granted, are markedly less likely to attend to the social, material, and emotional needs of family and friends than earlier generations. As a consequence, social solidarity is down and social pathology—from drinking to crime—is up. In Wolfe’s words, ‘High tax rates in Scandinavia encourage governmental responsibility for others; they do not, however, necessarily inspire a personal sense of altruism and a feeling of moral unity toward others with whom one’s fate is always linked.’”

Wilcox goes on to note that even if Obama’s audacious spending agenda provides short-term relief to the economic and social challenges that now beset the American people, in the long run the ‘Obama revolution’ is likely to erode both the religious and the civic fibre of America.